There’s been significant developments in the PIP-SIGA case since my last article (written when PIP was at $1.90) and I wanted to both summarize them and also establish some facts that seem to be points of confusion on the various message boards out there:
Fact: SIGA has tried twice now to dismiss the case or portions of the case (note that this most recent attempt was an attempt at a partial dismissal) and twice the judge has ruled that this is going to trial. The second dismissal was predicted in my first article.
Fact: There’s a lot of dispute as to what was binding and non-binding in this case. Here are the facts: the Merger Term Sheet was signed, the Merger Agreement was signed and binding, and the Bridge Loan Agreement was signed and binding. The terms of the licensing agreement (the “LATS”) were included in all three documents.
Fact: The LATS was included in each signed and binding agreement because while they were negotiating the LATS they decided to go all the way and merge. So the LATS was included in the BINDING merger agreement that both boards approved and signed. Just because a merger agreement was signed doesn’t mean the merger had to go through. The condition was that if the merger agreement didn’t go through a licensing agreement would be negotiated based on the terms included in 3 different signed, binding, board-approved agreements. The terms were the same in each agreement.
So question number one: Does the judge think the LATS was binding? Here are two quotes from the ruling:
A) “Therefore, I start with the premise that both parties intended to be bound by the LATS and that they believed it dealt with all essential terms.”
B) “PharmAthene has adduced sufficient facts to support one or more of its claims that SIGA breached its agreement with PharmAthene as it related to the contemplated licensing agreement.”
Question number two, and equally important for this case: were any essential terms missing from the LATS included in all three documents. In other words, did more negotiating have to occur. If so, that changes the picture drastically on what sorts of damages could be awarded.
Again, here are some quotes from the judge from last Wednesday’s ruling that suggest to me that no terms were omitted.
A) “Indeed, Edwards effectively opined that the LATS contains sufficientdetails to constitute a binding agreement.” [This quote requires some explanation. Edwards was an expert who was testifying on behalf of PIP that the terms of the LATS were sufficient to constitute a binding licensing agreement, an important point in this case. The fact that the judge says “effectively opined” is significant.]
B) “The fact that the LATS was attached to the MTS, the Merger Agreement, and the Bridge Loan Agreement, together with the negotiating history alleged by PharmAthene in terms of the communications between one or more of its representatives and Drapkin provide ample support for an inference that the parties believed the LATS contained all the essential elements of a licensing agreement.”
I will note that the judge was very balanced in this ruling and does suggest that there could be MORE terms than were included but seems to be on the side that there were at least SUFFICIENT terms and that other similar binding agreements had similar sets of terms.
Question number three: If there were a breach, how do you determine damages? SIGA says that in 2006 there was no way to know how much ST-246 would be worth and that events after 2006 should not be included in determining those damages. Here’s where the judge's quotes are very important. Does PIP get compensated for their expenses in 2006? Or do they reap the potential benefits of ST-246 going forward.
The judge specifically states that it might be hard for Pharmathene to prove a specific monetary number for damages based on what was going on in 2006. He states: “"I further conclude that, [...] it is unlikely that PharmAthene will be able to prove its claim forexpectation damages""
But, he is very clear that if there was a breach of contract, then the remedy would equal the wrong. He states:
“...well-accepted maxim of this Court's equity jurisdiction that equity will not suffer a wrong without a remedy." (my emphasis)
What does “remedy” mean? If PIP should be awarded the LATS, then the judge could potentially rule that SIGA has to simply give PIP the licensing agreement. Which means that PIP would get 50-90% (depending on the amounts, the countries involved, etc) of all future revenues on ST-246.
This quote is also similar to something the judge said in the July 22 hearing to discuss this motion: “But if a significant wrong has been committed, I am going to find some remedy for that wrong consistent with our legal principles, and I am not going to go along with some sort of a divide and conquer attempt, which seems like what's happening here”
The judge also states that he can look at events that have occurred since 2006 when determing the value of the remedy. Specifically, he states he can “consider all potentially relevant evidence, including evidence regarding what has occurred since the alleged breach."
This also is similar to what the judge stated in the July 22 hearing. When questioning SIGA’s lawyer on the value of a drug such as ST-246 the judge states: “The theory is SIGA can blatantly violate and breach a major commercial contract, and there's really no consequence to it.”
And what has occurred since the breach?
This is very important because we all know one big event that has happened not only since the breach in 2006 but even since SIGA filed this motion to dismiss: BARDA has awarded SIGA a contract worth potentially up to $2.8bb. This is a very recent event and is certainly important for assessing damages. The fact that a competitor to SIGA, Chimerix disputed this award with the SBA (and the SBA ruled in their favor) is not relevant. BARDA (and then SIGA) have put out press releases saying that there might not be enough small businesses that can fulfill this contract so SIGA would still most likely be awarded it. See SIGA’s November 18 press release on the topic.
So what’s next?
Trial to begin early January and last for eight days. The judge has stated he will rule by July. If he rules against SIGA, SIGA has 45 days to appeal. An appeal process can take 12 months but is unlikely to rule against the judge. They could then appeal to the Supreme Court, who is unlikely to hear the case. So the likely outcome is whatever the judge decides in July. The judge wrote a 32 page ruling on this motion to dismiss. He is being very careful in his language to cover all his bases. Its highly unlikely that will make a ruling that will then be easily overturned by an appeals court.
So what could happen?
A) Siga could settle. I’m not sure what the odds of this are. SIGA is not run by people known for settling (remember Perelman losing a $1.6bb judgement against Morgan Stanley because he wouldn’t accept a settlement). Then again, this case is a bet the company scenario for SIGA. This is their only product. Why bet the farm? If SIGA were to settle, the stock would go to $20-30 based on the future potential of ST-246. The only real overhang on the stock is this lawsuit. Any settlement would be worth a $7-10 price for PIP.
B) The court decides against SIGA. PIP would benefit enormously, far beyond $10.
C) The court could decide against PIP. PIP would still have the basic fundamentals of the anthrax vaccine in their favor. I’ve outlined what these fundamentals are in my prior article on PIP and how its worth $7-10 just on the basis of the vaccine. On their recent earnings call they discuss how they’ve reached significant milestones with their recent funding, including increasing the yield of their manufacturing process by over six-fold. Everything is on track with their basic fundamentals and the government is not going to be shirking from buying anthax vaccine at some point from PIP. Bioterror is a considerable threat and is not going anywhere. For PIP or SIGA.
For the reasons I describe above I was very pleased when going through the judge’s ruling. Of course there are risks in any trial but the quotes I list above direct from the judge helped me understand the range of potential outcomes in this case.
Disclosure: Long PIP